Does the Ubiquitous Red in the Silver Herald a Trend Reversal or Higher Future Profits?

Yellow and silver are our favorite colors, but red is what we are seeing on
the boards this week after the U.S. central bank dashed hopes for more monetary
stimulus and a weakened euro weighed on sentiment. Silver and gold were caught
in a broad market sell-off which spread across commodities and equities. Bullion
lost more than 3 percent over two days after the U.S. Federal Reserve released
minutes from its last policy meeting which showed policy makers were less
inclined to launch more monetary stimulus. This was strange since the Fed
did not explicitly take QE3 off the table. In fact, according to the minutes,
if the recovery stumbles, or if inflation is too low, the Fed is already prepared
to launch QE3. Press accounts report that the sentiment dimmed precious metals'
appeal as an inflation hedge.

All that red is still a post-breakout consolidation often seen before a rally
takes off, only this time, the consolidation is significant (2 months long)
enough to make even the staunchest precious metals bull feel nagging doubts.
We want to remind you of an investment rule of thumb-- the bigger the consolidation,
the bigger the following rally. It's like a coil, the more you press on it
and harder it will spring back, the more you pull back the bow the further
the arrow will fly.

Why are we so bullish and are not afraid to tread where others are rushing
out?

It's not based on intuition, or reading the minutes of the last Fed meeting,
or scanning the latest jobs reports. We base our calls on the current market
sentiment, fundamentals (to some extent) and technical analysis along with
related approaches (like fractal and cyclical analysis).

Technical Analysis has its rhythms, forms, textures and harmonies, and when
it is done well, it can be like a Bach fugue with intellectual depth, technical
command and even profound beauty. It is not an exact science, but it can help
us anticipate what is likely to happen to prices over time. Our notes and
scales are charts and proprietary tools developed exclusively by us.

Speaking of Technical Analysis - it's now time we turn to the technical part
of the essay. We'll start with the general stock market and then move to silver
(charts courtesy by http://stockcharts.com.)

In the long-term S&P 500 Index chart, little has changed in the past week.
Quoting from last
week's essay, "It seems that stocks may pause soon, as they're about to
reach their 2008 highs." Well, we did see a pause this week though the correction
may not yet be complete.

In the short-term S&P 500 Index chart, we are now seeing stock prices
below the short-term support line although this move has not been confirmed.
Prices are just slightly below this line however, and therefore only insignificantly
bearish implications are in place.

Let us now take a look at the Sunshine Profits' Correlation Matrix.

The Correlation Matrix is a tool, which we have developed to analyze
the impact of the currency markets and the general stock market upon the precious
metals sector. Currently, the coefficients for precious metals and the general
stock market are negative in the short-term, 30-day column but this is not
the case for the past 10 trading days. There appears to be a quite perplexing
influence here. Overall, with negative coefficients in the 30-day column,
the suggestion is that declines in the general stock market will not necessarily
be bearish for the precious metals sector, including silver.

Speaking of silver, let's take a look at charts featuring it.

Let's have a look at the long-term chart (you can click the chart to enlarge
it if you're reading this essay at sunshineprofits.com).
Nothing has changed in comparison with last few weeks as silver continued
to consolidate below the rising, red resistance-support line. The question
now is if the breakdown was confirmed.

It seems that confirmation of the move is not probable. We see a recent example
where silver's price remained below this line for four weeks and moved above
it in the fifth. Currently, we have been below this line for three weeks,
so the breakdown has not been confirmed and looking at another support line
based on previous local lows, there has been no breakdown whatsoever.

In the short term SLV ETF chart, we have more of the same implications. This
week's price action appears to be part of a double bottom pattern. Such moves
have been seen often and are not really cause for concern. The June 2011 bottom
and the September 2011 bottom are good examples of a similar pattern. All-in-all,
the situation has not turned bearish this week for the white metal.

Summing up, the short-term outlook for the general stock market is
a bit unclear but mildly bullish at this time. The link between the precious
metals and stocks is also somewhat unclear at this point. All in all, however,
the implications seem rather bullish for precious metals, including silver.
The situation for gold's little brother has not changed as much as
it might appear as declines have been seen. The white metal has likely been
forming a double bottom as has been seen many times in the past.

Taking a look at the situation in the precious metals mining stocks is quite
insightful in the context of the future moves on the silver market. This is
discussed thoroughly in our Premium Commentary.

Thank you for reading. Have a great and profitable week!

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Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who
takes advantage of the emotionality on the markets, and invites you to do
the same.

His company, Sunshine Profits, publishes analytical software that anyone can
use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem
that may never be solved, PR has changed the world of trading and investing
by enabling individuals to get easy access to the level of analysis that
was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are
results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals
sector. For that reason it is his main point of interest to help you make
the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for
professional excellence and ethics for the ultimate benefit of society.

Disclaimer: All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates
only. As such, it may prove wrong and be a subject to change without notice.
Opinions and analyses were based on data available to authors of respective
essays at the time of writing. Although the information provided above is
based on careful research and sources that are believed to be accurate, Przemyslaw
Radomski, CFA and his associates do not guarantee the accuracy or thoroughness
of the data or information reported. The opinions published above are neither
an offer nor a recommendation to purchase or sell any securities. Mr. Radomski
is not a Registered Securities Advisor. By reading Przemyslaw Radomski's,
CFA reports you fully agree that he will not be held responsible or liable
for any decisions you make regarding any information provided in these reports.
Investing, trading and speculation in any financial markets may involve high
risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates
as well as members of their families may have a short or long position in
any securities, including those mentioned in any of the reports or essays,
and may make additional purchases and/or sales of those securities without
notice.